Demand for small-business loans slows down to a trickle

Mike Herd, owner of Gable Integrated Services in Troy, Mich., would like to take out a small-business loan to cover production costs of bigger orders as they come in.

Mike Herd, owner of Gable Integrated Services in Troy, Mich., would like to take out a small-business loan to cover production costs of bigger orders as they come in.

Plenty of bankers have come to talk to him.

But money is very tight and the going has been slow, Herd said. The hang-up is that many banks likely do not want his building as collateral, he said.

"I'm sure their position is they don't need any real estate, but that's what I have," Herd said.

The demand for new loans for small-business owners has a lot to do with whether the owners expect business to grow and, ultimately, whether they could qualify for a loan under tight lending standards.

Eight out of 10 small-business owners say they probably or definitely will not take out a new loan or line of credit in the next six months, according to a PNC Economic Outlook Survey.

That represents the lowest demand in the history of the survey, which dates to 2003.

Kurt Rankin, economist for the PNC Financial Services Group in Pittsburgh, isn't surprised by the low demand for small-business loans.

"Both business and consumers realize that debt was such a big part of what threw us into the recession in the first place," Rankin said.

He noted that home-equity loans fueled much borrowing. But after home prices tumbled, consumers could not borrow as much, if at all, by tapping into home equity.

Many small-business owners are wary of the outlook for the U.S. economy, with nearly half of those answering the PNC Economic Outlook Survey saying they expect the Standard & Poor's downgrade of the U.S. Treasury to hurt their own businesses.

Overall, consumer confidence had been falling before S&P downgraded U.S. government debt on Aug. 5. S&P cut the long-term U.S. credit rating by one notch, to AA+, citing concerns about growing budget deficits.

To be certain, interest rates surprisingly did not climb after the S&P downgrade; rates actually fell.

The "flight to quality" drove down rates on U.S. Treasuries because investors feared that the stock market and other investments were becoming much riskier.

Even so, Rankin noted that if U.S. borrowing costs eventually do rise, that will mean higher rates for small-business owners.

Consumer demand remains low, so rising costs of any kind can be hard on a small business, he said.

If small-business owners do not see business picking up, they're not going to hire new workers.

"The main issue for small business is simply demand," Rankin said. "While business can reach (more customers) with the Internet, there's no buying. It's very much a demand story at this point."

Until business picks up, Rankin said, small-business owners probably will continue holding back from hiring or expanding.